GTN

Business Context and Reporting Period

Company: Gray Television, Inc. (formerly Gray Communications Systems, Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2002
Business Overview: The Company operates in three segments: Broadcasting (29 television stations in 25 markets), Publishing (4 daily newspapers), and Paging (wireless messaging). Broadcasting accounts for approximately 74% of total revenues. The Company is the largest independent owner of CBS affiliates in the U.S.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisitions: The Company significantly expanded its footprint in 2002 by acquiring Stations Holding Company (renamed Gray MidAmerica Television) for approximately $515.7 million and KOLO-TV for $41.8 million. These acquisitions added 16 stations and drove a 27% increase in total revenues.
• Revenue Growth: Broadcasting revenues increased 37.9% to $146.7 million, driven by acquisitions and a cyclical increase in political advertising ($16.6 million in 2002 vs. $0.3 million in 2001).
• Accounting Changes: The adoption of SFAS 142 (Goodwill and Other Intangible Assets) resulted in a one-time, non-cash impairment charge of $39.5 million ($30.6 million net of tax) recorded as a cumulative effect of an accounting change. This significantly impacted the reported net loss.
• Debt Restructuring: The Company incurred an extraordinary charge of $10.9 million related to the extinguishment of debt, including the redemption of 10 5/8% Senior Subordinated Notes and an amendment to the senior credit facility.
• Capital Structure: The Company issued 34.5 million shares of Common Stock and $40 million of Series C Preferred Stock to fund acquisitions and general corporate purposes.

Guidance, Outlook, Risks, and Contingencies

• Capital Expenditures: Management anticipates aggregate cash payments for capital expenditures, including digital television (DTV) systems, to range between $15 million and $16 million for the full year of 2003.
• Digital Conversion: The Company is converting to digital broadcasting. While 13 stations were on the air with digital signals as of the filing date, the Company has received extensions for the remaining stations and anticipates further extensions if necessary.
• Legal Proceedings:
  • IRS Audit: A dispute regarding the 1996 acquisition of assets from First American Media remains pending. The IRS withdrew a claim for $12.1 million in taxable gain, but maintains a claim that the transaction should be treated as a stock purchase, which could reduce the tax basis of assets by $166 million. The Company expects no immediate cash tax impact due to net operating losses.
  • Tarzian Litigation: The Company's ownership of a 33.5% stake in Sarkes Tarzian, Inc. is subject to litigation. Tarzian has sued the Company and Bull Run Corporation for tortious interference, seeking damages up to $75 million and title to the shares.
• Regulatory Risks: The Company is subject to FCC ownership rules, including national audience caps and local duopoly restrictions. The FCC is currently reviewing these rules, which could impact future expansion strategies.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and integration progress of the newly acquired Gray MidAmerica Television and KOLO-TV stations.
• Goodwill Impairment: Review the methodology and assumptions used for the SFAS 142 impairment test to ensure the $39.5 million charge was appropriate and assess the risk of future impairments.
• Debt Covenants: Confirm compliance with financial covenants in the amended senior credit facility and the 9 1/4% Senior Subordinated Notes, particularly regarding leverage ratios and dividend restrictions.
• Legal Exposure: Monitor the status of the Tarzian litigation and the IRS tax dispute for potential future cash outflows or asset write-downs.
• DTV Capital Needs: Track actual capital expenditures against the $15-$16 million guidance for 2003 to ensure liquidity remains sufficient.